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10 Trillion Reasons to Invest

Mutual funds keep raking in the money.

It's official. According to statistics released by the Investment Company Institute (ICI), the total value of all mutual funds in the United States topped the $10 trillion mark in October. Thanks to a net inflow of $286.6 billion in October, the largest level since January, funds were just barely able to clear the mark, by a scant $13 billion. Overall, fund assets have climbed more than $1.1 trillion this year alone. When you consider that the total market capitalization of all domestic and international companies listed on the New York Stock Exchange as of September was $23.1 trillion, it becomes clear that mutual funds have become a huge player in the investing world.

Mutual fund data provides a fascinating look at the ebb and flow of money throughout the financial system. You can not only see the total value of funds, but also examine how investors allocate their money among stock funds, taxable and municipal bond funds, and taxable and tax-free money market funds. In addition, the ICI provides information about how investors shift money from month to month.

Overall asset allocationLooking at the overall investment choices of fund investors, you can see that stock funds are the category of choice. With nearly $5.7 trillion in stock funds and another $0.6 trillion in hybrid funds combining stocks, bonds, and cash, one can conclude that about 60% of all fund assets are invested in equities. Somewhat surprisingly, cash is the next largest allocation, with about $2.25 trillion in taxable and tax-exempt money funds. Bonds comprise less than $1.5 trillion, and even when a portion of hybrid fund assets are added in, investors appear to have less than a 20% allocation to fixed-income investments.

Interestingly, the overall asset allocation in mutual funds has remained relatively stable over the years. During the heady days of the bull market at the end of 1999, stocks composed about 62% of the total assets in mutual funds, with 23% cash and just 15% in bonds. By the end of 2002, following the huge declines in the stock market, stocks represented about 45% of the total value of mutual funds, with cash at 35% and bonds around 20%. When you consider that falling stock prices were responsible for much of the decrease in value of funds, it becomes apparent that on the whole, investors stuck with stock funds throughout the decline.

Another interesting fact is that fund investors hold such a high percentage of cash. Although the current inverted yield curve makes returns on short-term cash investments greater than the yields available on the longer-term bonds held by bond mutual funds, bond funds typically provide higher levels of income under ordinary circumstances. Nevertheless, mutual fund investors prefer the instant access that cash funds provide.

Current investment trendsIn addition to overall figures, the ICI report also provides information about purchases and redemptions of mutual funds by investors. By looking at the report, you can see how investors are putting new money to work.

For instance, in October, a net total of nearly $57 billion of new money was invested in mutual funds. Of this figure, $32.5 billion was deposited into money market mutual funds. Stock and hybrid funds took in about $14 billion collectively, while bond funds received about $10.5 billion. Looking more closely at the stock figures, nearly all of the inflow was invested in international equity funds; a mere $0.4 billion went into domestic stock funds.

As you might expect, these figures vary quite a bit over different time periods. For instance, during the last half of 1999, bond funds experienced significant outflows, while stock funds reaped the benefits of bond fund redemptions. On the other hand, during 2002, bond inflows skyrocketed while stock fund redemptions outpaced new purchases for the first time since 1988. Also, flows among domestic and international stock funds have tended to oscillate back and forth as global investing has gone in and out of favor.

Other types of informationThe ICI report contains a number of other pieces of information of general interest. For instance, cash levels within stock mutual funds have remained relatively steady, around 4%, throughout 2006. Redemption level information also illustrates the level of portfolio turnover that mutual funds must have merely to meet the needs of redeeming shareholders.

For longer-term perspective on these figures, you can look to the ICI's Investment Company Fact Book. This resource not only summarizes the figures available in the monthly mutual fund reports, but also provides some analysis into the economic trends reflected in investor behavior. The Fact Book also includes supplemental information, including average fees charged to mutual fund investors. With average stock fund expenses around 1.25%, and bond fund expenses of 0.88%, mutual fund management is a $100 billion business on a recurring annual basis, driving the revenue of companies like T. Rowe Price(NASDAQ:TROW) and Ameriprise(NYSE:AMP). You can also learn about other interesting aspects of mutual fund ownership, including the percentages of funds owned within tax-deferred accounts and the rise of purchasing mutual fund shares through unaffiliated fund "supermarkets" rather than directly from the fund itself or through a traditional broker.

Seeing how other people invest can help you understand current trends and popular thinking. Because many savvy investors seek to stand out from the crowd, knowing what that crowd is doing is essential to any contrarian strategy. No matter what fund you pick as your next investment, though, you can rest assured that you're not alone. Each dollar you invest will have 10 trillion others right next to it.

If you're looking for your next great mutual fund investment, you might benefit from listening to an expert. Shannon Zimmerman pours his research skills and experience into creating each monthly installment ofMotley Fool Champion Funds, the Fool's mutual fund newsletter. Get full access to this wealth of information free for 30 days.

Fool contributor Dan Caplinger contributes to mutual fund inflows each and every month. He doesn't own shares of any of the companies mentioned in this article. The Fool's disclosure policy keeps you informed.

Author

Dan Caplinger has been a contract writer for the Motley Fool since 2006. As the Fool's Director of Investment Planning, Dan oversees much of the personal-finance and investment-planning content published daily on Fool.com. With a background as an estate-planning attorney and independent financial consultant, Dan's articles are based on more than 20 years of experience from all angles of the financial world.
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